Australian law firms

Thomson Reuters Institute: Australian Law Firm Midyear Market Update

Last week (22 February 2024) Thomson Reuters Institute published its midyear market update on Australian law firm’s financial performance. Overall the sector remains robust, posting year-on-year “growth” of 7.2%. “Growth” here being defined as:

A measure of total billable hours worked by the average law firm

Leaving aside the flaws in that definition, if we are to use it as a yardstick for year-on-year growth and a like-for-like comparison globally, then the Australian legal sector looks positively healthy – particularly so for those practising Dispute Resolution (9.5% growth year-on-year, although I question the low starting bar here as DR has suffered a number of negative years as a result of COVID) and “General” Commercial (7.5% growth year-on-year; and while no definition of “general” is provided it clearly doesn’t include M&A, which sits in a different bucket).

Black clouds?
If there is a black cloud around the numbers it’s leverage and expenses.

As the chart above indicates, leverage between partners, senior associates, associates and lawyers still looks out of shape when compared against firms in other jurisdictions.

What this chart indicates to me is that partners (in particular, equity partners) are still doing way too much of the billable work and not pushing the work down to more junior lawyers (which might be understandable if it was salary partners looking to make equity; but kind of suggests it is equity partners looking to retain equity points – maybe a post for another day!).

Having said this, it might also be a trait of the Australian legal market. We often don’t follow the 10-20-30-40 leverage model here in Australia.

A potential second black cloud is on the expense-side: lawyer renumeration.

While this appears to have cooled – down from 13% growth in 2023 to 7.3% growth in the first half of 2024, for those of us who work in this market day-in, day-out, there is an acknowledgement and acceptance that mid-level lawyers (those between 4 and 8 years PQE) are rare as hen’s teeth.

And the reason for that is simple – most see Australia as a small fish bowl and want to spread their wings in Asia, London or New York.

Who could blame them!

Some come back, many don’t.

But what it does mean is this: we pay a premium for mid-level [good] lawyers here in Australia!

The last black cloud has to be lateral partner movement.

The Thomson Reuters midyear market update doesn’t include a section on lateral partner movement, but it should. Not only because it would make for interesting reading, but also because it’s a good indicator figure.

As always, get in touch if you want to talk through any of the above.

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5 Reasons why your business development team should be working on your business strategy and not just putting out fires!

A recent article in the Global Legal Post by Ben Edwards: ‘Law firm marketing and business development teams spend more time firefighting than on strategy‘ threw up some very interesting – if not predictable – stats:

  • Two thirds (65%) of marketing and business development teams [in law firms] are spending more time firefighting then developing strategy
  • 80% of that 65% spend at least 2/3rds of their working year extinguishing fires, over providing strategic thinking
  • Just over half (57%) have a seat at the head table [when it comes to strategy input]
  • 69% of respondents said they spent most of their time on addressing short-term issues rather than focusing on long-term initiatives.

And the number #1 reason given for why law firm marketing and business development teams were running from one fire to another – a lack of investment in resources.

All of which leads me to ask this question:

Do law firm partners value the service they get from their business development and marketing teams?

Another way of putting that question is this:

Do law firm partners understand the strategic value that their business development and marketing teams can provide?

Because the evidence would suggest that they don’t.

By putting – let’s be frank – high paid personnel on firefighting tasks, your firm will not be getting good value for money.

So here are my 5 reasons why your business development team should be working with you on your firm’s strategy and not just putting fires out:

1. Industry focused

    Most business development professionals are laser-focused on industry expertise. They understand a particular industry sector – such as energy, resources, financial services, FMCG, property – and by and large stay in their lanes. As such, many have a deeper understanding of what is happening in that industry sector than the partners they work with.

    2. Market knowledge

    Really good business developers are on top of market trends and competitor intelligence. They should be able to tell you what your competitors are up to, how your competitors are ranked in the market, which clients your competitors are acting for and the relevant lateral movement in your sector.

    3. Relationship Building

    A critical skill of good business development professionals is building relationships. They should be able to not only tell you who the General Counsel at client and target clients are, but also who the lead procurement team will be on a pursuit or tender opportunity.

    4. Data analysts

    A good business developer should be able to look at a set of data and provide you insights. For example: should you be worried if the number of instructions you are receiving is on the decrease, but the value per file is significantly increasing?

    5. Results driven

    Every good business development professional will tell you they are only as good as their last result! By nature, they are very results driven and don’t rest on their laurels.

    So there you go, my 5 reasons why you need your business development team working with you on your next strategy day rather than just putting out fires!

    Also, get in touch if you need help with any of the above.

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    Survey: The cost of replacing that departing associate…

    If you’ve wondered how much replacing that associate or senior associate who just left you is going to cost, then a recent report from Big Hand provides the answer: circa $500k.

    That’s right, a cool half a million dollars!

    Those costs won’t always be upfront and apparent, they will include:

    • a possible increase in salary for your replacement associate over your previous associate’s salary (due to market pressure) – which is somewhat ironic as salary may well be the reason the old associate left you!
    • commissions to talent agents to find you said new associate
    • increasingly – signing on bonuses
    • training costs over the first 12 – 18 months to bring the new associate up to scratch on your firm’s systems and business development strategy.

    The list of actual and hidden costs here is almost limitless, and so the overall cost to your firm of replacing that departing associate/senior associate could actually be a lot more than $500k. Which begs the question:

    with 49% of surveyed firms having said they had experienced an increase in associate attrition, you have to wonder why this isn’t an area where more firms are focusing their attention?

    You also have to ask: Does asking someone to work 2,000 billable hours a year have something to do with these attrition rates among associates?

    And with 75% of surveyed firms having said they have seen a drop in demand for legal services, is this a cost you really want to be incurring right now?

    If you need help looking at your firm’s strategy, how to retain associates and differentiating your practice from the crowd, get in touch!

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    Where do AFAs rank in the cost savings pyramid?

    If you have been wondering where Alternative Fee Arrangements (AFAs) sit on the ladder of cost-saving for in-house counsel, wonder no more. This post [By-the-Hour Billing Torments Legal Departments. So Why Aren’t More Demanding Alternatives?] by Hugo Guzman on law.com yesterday (14/11/2023) will answer all your queries:

    • 66% of respondents said they plan to bring more work in-house as a cost-control strategy
    • 39% plan to shift work from big law firms to smaller ones,
    • 33% plan to leverage the use of technology and AI.

    And, drum-roll

    • Expanding AFAs ranked fourth, at 28%.

    Not sure how everyone else interprets that data, but it looks like a very sad state of affairs to me.

    Feel free to reach out to me if you want to discuss what this might mean to your business or law firm.

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    Who is sitting with you on your ‘Buddy Bench’?

    Yesterday (13/11) was World Kindness Day, and while I think that’s a great idea/concept – with the level of mental health issues that we have in the legal profession, you have to ask yourself:

    Why doesn’t every law firm office have one of these benches?

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    High-Value Retainers

    I put a post up last week on LinkedIn, off the back of a very interesting blog by Jordan Furlong on his Substack feed: ‘The legal world in 10 years (if we’re really lucky)‘, that got some social media traction so I thought I would re-share here.

    At the heart of my LinkedIn post was a comment Jordan makes on – what he calls – High-Value Retainers and the effect Gen AI will have on these fee arrangements. To quote:

    High-Value Retainers
    Thanks to Gen AI’s consumption of many traditional tasks, lawyers have moved up the value ladder, going beyond “bet-the-company” and “run-the-company” work to start offering “grow-the-company” work (or “advance-the-individual”). These are engagements in which lawyers ask: “How can I improve your situation? What are your near-term and long-term goals? How can I help you anticipate problems and prevent them before they happen? How can I bring you more stability and peace of mind? How can I be your advocate and counsellor in whatever you need?”

    While I think Jordan’s point is an excellent one, mine was this: “Do you think this could work in 10 years time?“

    Because if you think it could: Why are you waiting 10 years for AI to develop in order to have this conversation – have this conversation with your clients now!

    In that, it’s not a 10+ years from now discussion. It’s not a 10+ years from now problem. It’s a HERE AND NOW problem and a here and now discussion.

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    A lesson in pricing from Tesla

    Tesla, Elon Musk’s EV carmaker, published its Q3 results earlier today (Australia time). Profits plunged 44 per cent. But, from my perspective this was the interesting part: “after it cuts prices to boost sales“.

    Let’s unpack that for a second: Tesla “slashed prices by around 25 per cent in the United States during the last year” – “putting the priority on sales rather than profit“.

    As it happens, this is also a common trait of professional services firms: prioritizing getting the deal done over making an actual profit – including agreeing to heavy “volume discounts”.

    As the Tesla results show though, any price discount you give comes directly from profit – not sales revenue.

    So the price discount you offer your clients is essentially compounded on your bottom line – 10% is not 10%, it’s more like 30%.

    Or in the case of Tesla: a 25% price discount has resulted in a 44% plunge in profit.

    Something to think about when you are next thinking about what pricing options you have available to you.

    And please, don’t follow this advice:

    “I view it as a way to defend market share at the expense of margin” .

    Kevin Roberts, director of industry insights and analytics at CarGurus, an online auto sales site

    In professional services firms, market share should never Trump (pun intended) profit.

    As usual, if you need any help with any of this, feel free to reach out.

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    REPORT: Dynamic Law Firms consistently invest more in Business Development than Static Law Firms

    The numbers have been crunched and the results are in: ‘Dynamic Law Firms’ invest considerably more in their business development and marketing activities/departments than static firms are willing to do.

    According to the latest (8th) iteration of Thomson Reuters Institute’s 2023 Dynamic Law Firms Report, Dynamic Law Firms consistently invest greater sums in their business development and marketing teams than Static Law Firms:

    As you can see from the over graph, in 2022, on average, this investment by Dynamic Law Firms in their business development and marketing teams accounted to over $12,000 per lawyer. Roughly $2,500 more per lawyer than Static Law Firms.

    Importantly, this investment in business development pays off:

    With Dynamic Law Firms consistently outpacing Static Firms in all growth Key Performance Measures; but, most notably from a business development perspective, in both ‘worked rates’ and ‘fees worked’.

    So why is this? After all, business development and marketing is a ‘cost-center’.

    Well, as the Report itself states:

    “The first goal of MK&BD investment is to raise top-of-mind awareness of the law firm.

    Research conducted over the course of many years by the Thomson Reuters Institute has shown that top-of-mind awareness is a vital first step toward winning work – a process that will see a firm move along a continuum from awareness to being viewed favourably, to being considered for and ultimately winning work, and hopefully, to a point where the firm has gained enough experience with the client that they garner credibility in the board room and can begin to box out competitors.”

    A fact backed-up by the authors of Simple Heuristics who, in their principle of “recognition” [firm brand or lawyer], state that recognition is number one in any client’s decision process around whether or not to buy something.

    And so it goes without saying that this ‘awareness‘ factor is critical in the ‘buying cycle’. If we don’t have this advantage, then we need to hope to hell the other providers aren’t a known commodity so we can proceed to the next level in the buyer’s decision process (typically experience – have they done this before?; then can I trust them not to mess this up and make me look stupid! – SIDE NOTE: price isn’t in the top 3 decision making selection criteria.).

    Which is why, if you want to make sure your firm stays one step ahead of its competition, you actually need to be investing more, not less, in your business development team right now.

    Yep, the evidence is in. It’s undisputed. Business Development and Marketing is not a ‘cost center’ (not that I ever thought it was). They not only pay for themselves, but they ensure your firms stays ahead of its competitors and earns more $$$s.

    So the next time you think to yourself: “I need to cut costs, I’ll cut my business development and marketing budget” – I’m here to tell you that’s dumb – think again, because not only will it hurt you but it will take you on a journey to blandness.

    As always, feel free to reach out to me for a chat if you want to talk through how I can help with this.

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